>> rose: welcome to our program. we begin this evening with the obamama administration's side of the debt ceiling agreement in washington and the future of job creation, talking with jack lew. he is the director of the office of management and budget. >> today was obviously a very rough day in the markets. i think it reflects a deep unease about conditions not in the united states in particular but in other parts of the world and questions about the strength of economic recovery more generally. and i think going back to some of the points that were made in the clips that you showed at the beginning, it's quite striking that on a day when the market obviously took a real hit, when there was a flight safety money went into u.s. treasury bonds. >> rose: we continue with a look at global markets and influencing factors with steve

rattner, nouri al rabinny, bill sahlman and bill gross. >> what they're worried about today is slow growth, recession and risk. and e fact is, over the last couple of years we put a lot of stimulus in the economy, we got the economy growing again but it's like pumping air into a balloon. >> rose: you think there's a real threat of a double-dip recession in. >> i think there is at this point at least a 50% probability. >> i think you have to think about a new kind of manufacturing. i think a lot of people are going to start to move manufacturing back here. >> today we have global economies in the developed world that were based on expectations of 2% to 3% growth and now we're looking at 0 or perhaps something less. and so this stability that was is leading to instability in the future based upon slower economic growth and/or recession and therefore declining profits. >> rose: a look at markets and the defining factors of our economic future next.

♪ ♪ [ male announcer ] if you've had a coke in the last 40 years, you've played a part in building our global recycling program. ♪ who beats the oddsa hero and comes out on top. but this isn't just a hollywood storyline. it's happening every day, all across america. every time a storefnt opens. or the midnight oil is burned. or when someone chases a dream, not just a dollar. they are small business owners. so if you wanna root for a real hero, support small business. shop small.

captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> rose: we begin today with u.s. stocks in international financial markets that too another hit today. the dow jones industrial average lost over 630 points. the dow fell below 11,000 for the first time since last november. it is the biggest one-day point drop since december, 2008. these losses come after standard & poor's cut the.s. credit rating from a.a.a. to a.a. plus on friday night. toy president obama dismissed the downgrade and expressed confidence in the u.s. economy. >> on friday we learned that the united states received a downgrade by one of the credit rating agencies. not so much because they doubt

our ability to pay our debt if we make good decisions, but because after witnessing a month of wrangling over raising the debt ceiling they doubted our political system's ability toll act. the markets, on the other hand, continue to belie our credit status is a.a.a. in fact, warren buffett-- who knows a thing or two about good investments-- said if there were a quadruple a rating i'd give the united states that. i and most of the world's investors agree. >> reporter: the president urged congress to continue tacking the nation's debt and receive it is. >> last week rereached an agreement in historic cuts in defense and domestic spending but tre's not much further we can cut in either of those categories. what we need to do now is combine those spending cuts with two additnal steps: tax reform that will ask those who can afford it to pay their fair

share and modest adjustments to health care programs like medicare. making these reforms doesn't require any radical steps. what it does require is common sense and compromise. >> rose: treasury secretary tim geithner also criticized s&p's downgrade. >> i think s&p has shown a stunning lack of knowledge about basic u.s. fiscal budget math. >> rose: joining me now jack lew. he is the director of the office of managemen and budget i'm pleased to have him back at the this table in new york. welcome. >> good to be with you, charlesly. >> rose: thank you for coming. so how do you assess this first... what's happening in the markets today? >> today was obviously a very rough day in the markets. i think it reflects a deep unease about conditions not in the united states particular but in other parts of the world and questions about the strength of economic recovery more genelly.

and i think going back toome of the points that were made in the clips that you showed at the beginning, it's quite striking that on a day when the market obviously took a real hit, when there was a flight to safety money went into u.s. treasury bonds. so the... >> rose: some say that's because they have nowhere else to go. >> well, but itis amark of the enduring belief in the markets that the united states is a safe haven. i think that if you go back to some of the comments that secretary geithner made yesterday, the standard & poor's rating that came out last week was alytically quite flawed. it actually didn't even do the math right. it made a $2 trillion error. and when you correct their math, it actually puts the united states into the category of countries that they rate as a.a.a. it kind of gets back to the point that... >> rose: countries like france. >> yeah, places like france and the point the president was making is ty fundamentally were making a political

judgment. we've just come through a very unfortunate four, five, six-week period when there was a lot of self-inflicted damage because there were some in the american political system who thought it was the right thing to do to have a policy debate by pushing the economy right to the edge. thankfully-- due to the president's leadership and through the work of the responsible leaders of congress-- we were able to astlaert disaster. but it shows how irresponsible that kind of behavior is that it leads people to doubt the ability of our political system to work. >> rose: let me go to one single point. do you believe this market is reacting to the standard & poor's classification? >> no, i don't. i think were that the case you wouldn't have seen a flight to treasuries today. i think that there are a lot of things happening. there were developments in europever the weekend. europe's trying to take actions to get its fiscal house in order. i think that the irony of today

is that notwithstanding standard & poor's decision on friday the safest place in the world to put your must be was the u.s. treasury bond. >> rose: do we benefit from the fact that these cuts d not take place immediately because if it took... the cuts did take place immediately it would do harm to economic growth. >> i think it would be very unwise to move too quickly into... >> rose: spending cuts. >> reducing spending. we have a very delate balance we have to strike. we need to be on the medium and long-term path towards bringing our spending under control, but we still have a very delicate economic situation where were we to throw the brakes on right now it would hurt. none of the cuts tt are going to take place this year or next year are of a level that will r croeconomically significant. >> rose: so they will not impede economic growth if it can be... >> no. but as the president said in his statement today, it's important that we also take some actions to continue to promote economic growth. for example, we have a payroll tax holiday that expires at the

end of the year, we need to exend that for another year. clearly the economy needs that. we have long-term unemployment benefits that expire at the end of the year. we need to exend that again as well. >> rose: do you expect they will happen >> you know, i think it's going to be a challenging environment in congress, but i think it will happen, yes. i think the need for it is clear. i think that the choice between economic policy that will reduce growth or increase growth right now, we really need make a decision to increase growth. >> rose: people who run budgets have to make assumptions about theconomy. what are your assumptions about the growth of this economy over the next 18 months? >> you know, i think over the next 18 mths we see the economy continuing to grow, though not as rapidly as we would like. >> rose: so that means what happened in terms of artery quarter? >> i think that the current projections are that the second halff the year will b growing i forget the exact rate, but it's in the 2.5% to 3% range.

it... it's not 4% that you need to really feel comfortable, but the second hf of the year is still looking like it will be better than the first half of the year. and we project that that will continue. >> rose: into 2012? >> into 2012, yes. >> rose: what are your predictions or expectations about unemployment? >> the unemployment rate has been coming down too slowly. the unemployment rate this last month, the numbers that came in last friday came down by a tenth of a point. >> rose: over the next 18 months can you get it down to 8.5%? >> you know, i don't want to predict point estimate the next 18 months. obviously each month we'll have to work... each day we have to work. >> rose: and how are we going to get those jobs? >> we have to have... do a few things. first, we have to project the kind of stability that is required for the private sector to come off the sidelines and invest. businesses in america are sitting on trillions of dollars of reserves right now and in the

end it's not going to be the last 50 or one hundred billion dollars of public money that causes real growth, it's going to be private money coming off of the sidelines. so i think that the last month has not been a good thingor that. i mean, if you... if i were sitting on main street watching washington these last four week it wouldn't have given me comfort. i think fact that we reached an agreement and we have a special mmittee that going to be working hopefully in a much more civilized orderly way to work through these issues, we'll start to build that confidence back up. >> rose: everywhere you go in this debate-- and people want to look at history and talk about the stimulus program-- i don't know the answer to that, how efblgtive was it? >> you know, the thing we've learned in the last few weeks with the economic statistics coming out was that when the obama administration began, the economy was actually even deeper in a recession than anyone knew at the time. and that meant we had a longer way to climb out. i think if you look at what the recovery act did, there are

millions of jobs in our economy today that wouldn't be there without it. millions of jobs. >> rose: what kind of jobs are they? where are they? >> well, the direct jobs that were created through spending on everything ranging from public works programs to keeping teachers and firemen at work because of assistance to state and local governments. indirectly, it was a program of stimulus that created demand through a whole variety of mechanisms just to get people to spend money. >> rose: if you were redrawing that, would you still use tax incentive it is way you did? >> so i think between the public works, the tax relf and the transfer payments to sta and local governments and to individuals it was a pretty effective package. it obviously didn't put where you say we want to be. where we want to be is robust organic growthn the economy and a much lower unemployment rate. >> rose: there are many people in the democratic party who supported the president asked two questions, one, he should have been tougher. he should have been a better

negotiator. and how far was he prepared to go in terms of cutting entitlements, extending social security, the age of retirement, those kinds of things? because they were never really on the table as far as anybody could see. >> the president was a very tough negotiator, actuay. in this negotiation, in some ways the most important thing was to resolve in the a way that didn't involve going to policies that were disagreeable to either side. >> rose: that's why he didn't commit because he didn't want to go to this that were disagreeable to both sides? >> and to move the debite the a time when the debt limit was not hanging over the economy's head like a sword of damocles. >> rose: so he made a decision to do this now so he could fight another day? >> so if you look at what was in the package, i was describing discretionary policies for defense and non-defense programs that we think would be part of any balanced deal. the issues tt you were asking about-- entitlement reform and

medicare and social security-- those would have to be part of a balanced package, a pajage that would include revenues as well. since there wasn't a willingness to put revenues on the table; what was set up was a process, but a process where a powerful committee is going to be set up with an enforcement mechanism behind it. that enforcement mechanism is not something that' attractive to anyone. it's $1.2 trillion of cuts-- half defense, half non-defense-- that would i think be unacceptable from the perspectives of both right and left. so this committee has a real challenge to do its work between now and december and i think it's important to look what happened if the comttee fails. i hope the committee succeeds. we're going to do everything we can as the president said, today he's going to put a balanced plan out for the committee to work with. >> rose: which would be more specific about the things he would like to see? >> yes. but ifhe committee fails the cuts don't take effect the next day. the cuts take effect in january, 2013. january, 2013 is animportant date. it's the date when the bush tax

cuts expire and it's also the month when the next presidential term begins. we're going to have a national debate between now and january 2013 where the american people will make some very fundamental decisions. and i think combination of the committee with a strong inge sentive to act now and a backstop that will force action either through the automa'am i can mechanism or subsequent action by congress and a national debate on priorities gives us a chance to get beyond the... what washington witnessed. rose: how much do you measure the defense... everybody thinks defense is on the table and a lot of people say it should have been andt should be. do you agree with that? >> i think everything s to be on the table. i do think defense has to be on the table. >> rose: so we've moved to a new place in this discussion about budget in which there's serious people raising serious questions about the size of the defense budget. >> i think defense has to be on the table but it also is important that a decision we make on the defense budget has to be tiedo a strategy for our

national security. one of the tngs the president said when he reacted, say, to the recommendations of the bowles simpson report, one of his reservations about it was th it had a much larger cut in defense than he could reconcile with the national security strategy. >> rose: we might not have as many troops in afghanistan or iraq or... >> but at the time those recommendations were made, it was a number he couldn't reconcile a national security strategy we could be comfortable with. and i think it's important we make all the decisions. if you were talking about medicare or social security, the same issue would really be there: what is the impact of it? can we live with the consequences of it? one of the reasons it's so important everything be on the table is when you take one or another thing off-- whether it's defense or revenues or entitlements-- there's not enough left on the table to make sound decisions. you end up going so deep that you do violence to things you don't need do violence to. i don't think the problem is that hard to solve is everything is on the table. >> rose: using your own words do what we're looking at in terms of spending cuts do violence to what we should not do violence

to? >> you asked about the kind of entitlement reforms the president would go to. i think that the kinds of things that the president and the speaker were negotiating over did not do violence to the programs because it was balanced. you take something like that... compare the budget that the house passed that i think did do violence to medicare. it would do violence to medicare and it would take away the basic security that any retired person has. what was being suggested in the conversations with the president and the speaker were much more modest changes that had serious structural significance in terms of both spending and program but it didn't put the burden that heavily on any one individual or group of individuals. >> rose: what do you say to those who now look at what jt happened and say the tea party for whatever judgment you make about them has started a debate about the deficit and about spending that was long overdue in america. >> i think the debate was going on already. i think that there have been

serious people focusing on these issues. the bowles-simpson commission... >> rose: but that's in the last december of... >> it was a year ago. >> rose: december of 2009. >> and before that there had been debates for last two years on it. i think that the... you know, the reality is that we can't look at the finances of the united states over a 10, 20-year period and watch the debt as a percentage of g.d.p. cross 100% and say that's okay. we have to do something about it. we have to keep it at a level that's affordable. we do not have an immediate crisis. we're not in a position where the united states is in any immediate risk of being uncredit worthy. we do have a fuchler in our control that we have to affect. i think the tea party... you know, in my conversations, my appearances and testimony before committees, there are some who say why don't we balance the budget tomorrow? as if that were possible. it's not possible. it's going to take a long time.

we're going to have to march there... the ryan budget, the house republican budget doesn't do that. the debate has to be bound... >> rose: ten years? not even ten years? you can't do in the ten years? >> you can't balance in the ten years. >> rose: you could reduce the deficit but you can't balance the budget. >> you could get the deaf stit a point where as a percentage of g.d.p. it was not adding to the problem. >> rose: where is that? the percentage of g.d.p.? >> it's just around 3% of g.d.p. so at the point where the only deficit that you're running is the interest on the debt that was accumulating in the past, what you're essentially saying is that our current spending is not adding to the problem. you have to hit that in order to get the balance. >> rose: right. and >> and the plan the president and speaker were negotiating would have achieved that. it would have been important and it's a tragedy... >> rose: as you know, the speaker also has said in further conversations that as soon a they were discussing that, the prident came back and added more and changed the termsf the dialogue, that's what the speaker said.

>> so obviously there's a different version of that story the pieces and balance where we could both come together, when the president and speaker spoke for the last time in their negotiations. the president said to the speaker, look, there's a choice here. we can go for the lower level of revenues and dial down some of the entitlement reforms or we can go for the higher level of revenues and achieve more entitlement reform and overall deficit reduction. why don't you call me back and i can go either way. that was the last conversation the president and speaker had. you know, that was... led to a period of almost 24 hours before the president heard back and when the president did hear back... >> rose: is this the time where the president couldn't get him on thehone? >> yeah. but the prior nversation before that was the president

ying "i can go either way." and it just was a question of finding the balance right. you know... >> rose: give me more revenue and ll give you more cuts in entitlements. that's what the president said? give me more revenue and i'll give you more cuts in entitlements? >> it's not me giving you... >> rose: well, that's the way... >> these things need to move in tandem. >> rose: but that's basically what you said. the president said give me a chance to create more revenues and i'll give you more cuts i entitlements. >> revenues aren't easy for us and entitlements aren't easy for them. so this is a question of fairness and balance and moving to where everyone can be comfortable. >> rose: let me ask you... >> i would also add, charlie, that in that conversation, i don't think it does a great deal of good to point fingers as to whoa introduced issues. in one of the very last conversations, the speaker introduced repealing key parts of the affordable care act as one of the conditions of the agreement. we weren't out there screaming "moving the goalpost." he was searching for something that would make it easier for his people to vote for it. we were searching for something at would make it easier for

democrats to vote for it. and put balance in the package. obviously it w unacceptae to the president to real the affordable care act. it turned out to not be acceptable to the speaker to go higher in revenue. but what we learned was the speaker couldn't even go to his original offer. he couldn't... he would have called the president back and said "let's goor the orinal package, maybe a little lighter on entitlements." but he could don't that. i think he went back to his caucus-- and whether it was the tea party or the general atmosphere, it wasn't something he could sell. >> rose: characterize negotiations. probably the most interesting thing you've seen in your professional life? >> this was veryhallenging and difficult negotiation. >> rose: the clock was taking. >> the clock was ticking but it was also basically from the end of june from, like, june 24 or so until the agreement it was non-stop 24/7 with different negotiations going on alternatively sometimes over a... >> rose: some say if the president supported more forcefully bowles-simpson it

would have been better off. that there was the failure of presidential leadership. >> i thi the president at every step in this process has been meeting... leading by example. you know, when the bowles-simpson commission came out, he embraced the general direction. he said he has reservations. he talked about defense and also in revenue it went far deeper than we had proposed. so if our suggtion to the speaker was unacceptable, doing three or four times as much revenue wasn't going to be more acceptable. so in the senate when the group... the gang of six came up with 30 something senators, the president embraced it immediately. and it was not... it was clear that that wasn't going to become acceptable in the house republican conversation right away. so leadership... you know, he put out on the table a plan that is balanced. he in negotiations was willing to move farther along the spectrum. he hasn't walked away from anything he's put out there.

he remains prepared to be engaged. >> rose: so if republicans step forward to say this campaign will be about the president, leadership and also the congress in part if the president can make it and this that and secondly it was about the role and size of government. do you say and does the president say and do political advisors say that's good for us? we' prepared to fight on those grounds? >> you know, i think that this ally is a debate about if role of gernment and some very fundamental ways. >> rose: and size of government. >> role and size go together. i think the question ofwhether we as the richest and greatest country in the world decide that we're going to look at our senior citizens and say that we're not going to stand behind commitments we've made to them, we look at the least fortunate amongst us who qualify for programs like medicaid and say, you know, we'll block grant that and let the state decide, cut it back, you that it means states don't have money to provide health care to poor people. those are very fundamental kinds

of decisions. retired people have been the backbone of our society. i don't think as a country we want to turn our backs on them. i actually think if you look at e choices that we have and you put all the options on the table, the american people actually believe in balance. the american people aren't against having defense on the table, they're not against having tax cuts, particularly for wealthy people on the table. they're not against us tighten our belts a bit on these entitlement programs. >> rose: you could argue, finely, that that is the economic judgment of the president that's also his political calculation, too. >> you know, these last few weeks there's bee a lot of questions about where's the line between economics and politics. there were some who said that his insistence that we not accept a reprise of this battle in six months or nine months was political. i have to say, had we not drawn the line, had he not held to

th line, if we faced 18 months of uncertainty over the american economy, it would be a teible thing right now. i think the question about core values in terms of what we do in terms of the social compact in this country, how we balance responsibilities, that's substae as much as politics. people vote based on what they believe and i think... i hope it's resolved by december 2011. i think it can be. i think the committee begins where the president and the speaker were they can make good progress. if they fail to, you're going to have a national debate where the choices will be clear and they won't be choices that just affect a year or two. it's a kind of generational set of decisions that ought not to be made without the public understanding the consequences. >> rose: i agree with that. thank you. >> great to be with you, charlie. >> rose: thank you. jack lew, director of the office of management and budget. >> rose: we continue our conversation on today's market losses. joining me from new port beach,

california, bill gross, founder and chief investment officer of pimco. bill sahlman is a professor at harvard business school. with me in new york steve rattner, a former counselor to the treasury secretary, a private businessman and foerly president obama's car czar. also here in new york, nouriel raw beanie. he's the chairman of roubini global economics androfessor at the stern school of business. i am pleased to have all of them here. we want to look at what's happening in markets and the significancef what the standard & poor's has done. bill gross, what happened in the markets today and how directly is it linked to specifically the standard & poor's degrading? >> well, we saw lots of derisking, charlie, not directly linked to the s&p downgrade but that was a spark. i think what we have is a second minsky moment here over the past few weeks.

minsky said stability leads to instability. we saw the first moment around lehman brothers in 2008 when the stability of the housing market led to tremendous instability today witch global economies in the developed world based on 2% to 3% growth and now we're looking at 0 or perhaps something less. and so this stability that was is leading to instability inthe future based upon slower economic growth and/or recession and therefore declining profits. >> rose: and how longdo you see that stretching out? >> well, for some time now. i mean, the world is in a delevering situation. certainly developed world has too much debt and not just from the standpoint of sovereign balance sheets but also household balae sheets and historic economists such as rogoff and reinhart that have written books about this basically suggest something of the order of seven years of fat and seven years of lean or

perhaps even more and we're only three to four years into this delevering cycle. >> rose: standard & poor's didn't say anything that you haven't been saying for at least six months or so, right? >> i don't think so. we've basically been suggesting that the united states was a a.a. type of credit, with apologies to president obama and secretary geithner. i mean, they have not only $10 to $12 worth of existing debt, but perhaps $60 trillion worth of future liabilities discounted forward. those are medicaid; those are medicare; those are social security. basically the united states to some extent resembles some of the southern european countries in terms of their debt liabilities. we just haven't recogzed i yet. >> rose: nouriel? >> well, he's absolutely right but one of the paradoxes of what has happened today is that in the euro zone when there's fiscal trouble the interest on the government debt goes much high. but today the yield on government bonds in the u.s. went down in spite of the downgrade by s&p because we were in a world in which now there's

a risk of a double-dip cession, there's a risk aversion, risk is off, economies are turning down, equity markets on the risk are going down and the safest place is still u.s. treasuries. it's like the tallest midget or in the beauty contest where the least ugly is the u.s. treasury. >> rose: the float of the money today to u.s. treasuries? >> yes, because we've been in a world which is going to go into a recession, inflation is going to become lower, the fed is going to save their interest rates for years to come, wherever there's a risk aversion people doubt emerging markets and euro and they go to the safety of the dlar and treasuries and china, in spite of complaining about u.s. treasuries, no option to keep on buying them because otherwise its currency would appreciate so manufacturers are keeping interest rates low and they immediate lead them lower if there's going to be a recession so the downgrade affect of lowering interest rates on treasury bonds. >> rose: you think there's a real threat of a double-dip recession?

>> i think there is at this point at least a 50% probability. old economic data from the g.d.p. suggests less than 1% growth in the first half of the year. that means that unless you reaccelerate and go to escape velocity, you're going start to fall down. the labor market dynamic, housing is dynamic, investor, business, consumer confidence is down. and now you have this very sharp equity market correction, home prices have already fallen more than 35%. negative effect on the houses, now off 15% correction in equity markets so the wealth of houses is going down. the assets arefalling in value, their mortgages, consumer credits are still very high so we aret the risk of a double dip. and compared to the past, in the past we had all the policy bullets. you could do zero policy rates. q.e.-1 credit easing. you could backstop, you could do 10% of fiscal stimulus. right now we're running out of policy bullets.

if this downturn continues in the markets of the economy, we cannot do more fiscal stimulus, it's goi to be a fiscal drug because of spending cuts. it's not going to make much of a difference. >> rose: even though spending ts are not coming until a couple years later? >> well, actually, there's a lot in next year. if you look at the data, if you're going to let expire the payroll tax, if we're going to let expire unemployment benefits going to have spending cuts, going to expe, next year we could have a fiscal drag of almost $00 billion. the solution to our fiscal problem in the medium term is to cut spending, raise revenues but the economy is weak on the tip of a double dip, the short term should be stimulus. we should commit to medium term fiscal us a stirty, not front load it. we have all these unemployed people people working construction, we have crumbling infrastructure. doesn't take a genius to put two antwo together.

let's put them to build roads. >> rose: you've heard this song before, have you? >> and i don't disagree. a couple points, as nouriel said i don't think this market meltdown is about the s&p our our credit about to go bankrupt. as nouriel said, this flood of money into treasuries suggest that that's not what people are worried about today. what they're worried about today is slow growth, receson and risk and the fact is over the last couple of years we put a lot of stimulus in the economy, as nouriel said, we got the economy growing again but it's like pumping air into a balloon. we didn't fundamentally solve our structural problems at at some point we have to do that. a lot of this is about what kans called an million spirits. in washington there's no confidence. no confidence in our leadership, quite frankly, in congress especially. in confidence in europe certainly about the leadership there. nobody knows who's in charge of europe. angela merkel is hiking in the italian alps while europe is melting down so people are scared and when they're scared

they run and you don't know where they stop running. 2008 was not that long ago. supreme not forgotten 2008. >> rose: what would it be necessary to restore confidence? >> i think it would require a little of what nouriel said. a sense of action on the part of leaders that made sense. we all agree we have a fiscal problem. as nouriel said, it's something we should deal with in the long run. this budget deal doesn't cut spending that much in the short run nor does do it anything to stimulate the economy, extend the payroll tax credit, encourage jobs or anything. and congress has an 82% disapproval rating at the moment as you know. the president spoke today on. i'm a supporter of the president but the market went down while he was speaking and all through it so he habit succeeded in getting the country monlized behind him so there's no feeling in this country this that there's leaderip or any focus on the problems. >> rose: sneeze the so-called balanced grand bargain had taken place. would the econom, would the market, would people have reacted with more confidence and put us on a different path?

>> i don't think so, charlie. the fact that congress has an 18% approval rate is probably because people didn't understand the question. the democrats and republicans have imposed on the u.s. economy one of the greatest tax increases in history which has to do with the uncertainty tax. and the fact is going back to what bill gross mentioned about health care liabilities, we have at least $60 trillion of vested unfunded liabilities and we did not reform health care. what we did was we reformed access to health insurance. not access to affordable health. and until you actually deal with the health cost issue, i don't think you're going to solve the fiscal problem and s&p in downgrading the u.s. was acting as they almost always do in the rear-view mirror. we've got real fiscal problems

and i don't know what th could have done to move the needle much. >> rose: even the president says he now wants to pivot to jobs. what can be done that will create jobs over the next three years, say? >> well, you know, it's a vicious circle right now because the firms are saying we're not hiring workers because there's uncertainty and there's not enough demand. but if you're not hiring workers there's not enough labor income, there's not enough consumer confidence, there's not enough consumptn, there's enough enough final demand. so we're in a situation right new now in the united states there has been a massive redescription of income in the last two or three years from labor to capital, from workers to profit makers, from households to firms. and we know the marginal (inaudible) is greater than marginal pro pence toy spend of a firm because firms tend to save rather than spend and therefore that distribution of income, now the inequality in income and wealth is as high as it was in 1929 is leading to

lack of demand. in germany where instead of firing everybody like we did, they kept people with thei jobs now there is a better recovery. we saw the markets work but they failed the financial markets but even the labor market now is failing because it's a vicious circle. >> that's exactly what i wrote about in the financial times. i called it a vicious circle because it's not just a jobs problem, it's an incomes problem. the average income of an american worker has gone down by about 2.5% over the last three years over adjustment for inflation and the only place i would dagree it's not just about income inequaty, that's a big problem, but also about glob competition. take the automobile industry-- that i kw a little bit about-- a detroit worker makes $28 an hour. volkswagen has just hired 2,000 people in chattanooga, tennessee at $14.50 an hour to do the same jobs. it's hard for people to spend money if they're making half as much as they were making before. so i'm a free trader, you're probably a free trader, i think

everybody here may be, but you can't ig noir the fact that the world. economy has put downward pressure on wages in this country and that's not an easy problem to solve. >> we have the global economy and that pushes the wages on unskilled workers. >> rose: the solution to... whether there's an appetite for investment is another issue. bill sglosz >> well, nouriel has it right. i would simply addthat one additional imbalance is the global imbalance between developing and developed. we've seen a tremendous transfer of wealth not only in the form of assets but only in the form of labor from the united states and developed countries to asia and other parts of the world. one way to rebalance that would be certainly for china and to give the administration credit they've been on this for a number of years but with no results. to have china basically

rebalance the imbalance by appreciating their currency significantly. not 3% to 4% but 10% to 20%. that would be a start. another solution and this is basically a forbidden topic and i'm amazed it hasn't come up over the past several years but it did in the 30s and that's perhaps the reason why it hasn't but brazil is employing by brazil types of tactics and fwhekd the united states employ a buy american type of tactic. does that speak to tariffs? do a certain extent it does. if the way to rebalance to provide jobs and the united states... >> we had a stimulus bill, and unfortunately that has outsourced to congress and congress sort of spun in the a way that i think was not related to the kind of investments your guests are talking about. but imagine the following proposition where oil is now $90 used to be $100 bael.

you can retro fit buildings in the united states and gate six-year pay back. you can probably earn between 10% an 15% a yefrnlt it's not that there aren't opportunities to earn money and to lower our dependence on foreign oil and provide domestic jobs. we just haven' had the skill to figure out how to allocate the capital in a way that's not politically drivenut is instead focused on how do we create meaningful jobs in the economy to that have a long-term payoff not just a short-term expedient payoff. in massachusetts we spent more money building sound barriers on the mass pike than we did investing in true infrastructure that would have a long-term payoff. >> we need a growth policy? this country. we don't have a growth policy, right? it means to have a growth policy for investing in human capital in skills and making our workers more competitive to have health care that's affordable, to have an energy policy that we

don't depend on the rest of the world in believing that actually having manufacturing makes a difference. it's not okay. so we believe that just market work but sometimes markets do nowork and unless we have a growth policy that looks at the future and others are going surpass us. >> i think you have to be careful about what you wish for because i'm not sure you wa to outsource to the congress or even the white house, quite frankly, the job of deciding which industries we want to support, which industries we don't want to support and so on. that's risky business. >> no, no, i'm not talking about industrial policy because that's in europe. i'm speaking about growtholicy investing in education, in human capital, investing in infrastructure, not to just pick winners, we cannot do that, but having an environment in which the private sector can apply. we don't tt environment. >> but you said a minute ago you wanted to support manufacturing and i did spend a lot of time around manufacturing in th auto business. it's a very difficult world,

manufacturing in the u.s., for all the reasons i was talking about and you were talking about. you can say we want to support manufacturing. at some point it comes down what are our specific policies. there i want to be careful. we don't get into industrial policy because i think it's dangerous. >> how do you encourage support, create a manufacturing base in the united states or is it because of the income issue you raised earlier almost impossibly. >> i spent five days in germany because as nurp yell mention germany has done interesting thing there is and you have to focus on industries whe you can compete. so germany is good at make magazine tools and very specialized kinds of equipment. very obscure kind of things that other things don't want to take the trouble or have the skills to make. they don't think they canmake steel and compete against the rest of the world. they don't do it through industrial policy. they did it thrgh a program of tionalizing the labor market, deregulating the economy and have government stepback.

it's not perfect even in germany in return for job security. and the last thing i say about germany is they, of course, have benefited from the euro. they are huge winners from the euro. it's a depressed currency relative to germany's fundamental strength that has allowed them to outexport anybody. >> one of the additional ways to do it is to depreciate your currency to a certain exfeint the dollar goes down, manufacturing becomes more competitive and the united states we've been doing that with low interest rates and perhaps term in terms of federal reserve policy we'll see that. although it doesn't improve living standards, it presides are a manufacturing base if that's where we need go. >> with retalking about highly skilled labor and that kind of thing? because if you look at the kind of exports germany has, what are they? are they highly skilled manufacturing? >> they are far more...

>> charlie i.... >> ros bill? >> i think it's hard, very hard to think about replacing what has been destroyed over the years. i think you have to think about a new kind of manufacturing. i think a lot of people are going to move manufacturing but it will be with ample amounts of capital. robotics is going to work productively with less skilled labor than was required historically. so i think what's going to happen is we're going to create a new element o the manufacturing sector, some aspects of it will be dren by a low dollar but some pects will be driven by all of the problems that ultimately are going rise in china and other places. these are not panaceas, these are not perfect things that are going to grow 10% a year for the rest of eternity. we have to look at the moving picture and less at the snapshot so i'm more optimistic if we can

get more domestic opportunities and have the right kind of labor and capital match to those students. >> rose: are there available programs for retraining of workers that work and can be creating by either... something from the federal government? bill sahlman? >> well, i'm not wildly optimistic. i think actually what's going to happen is the possibilities are there for corporations to take control of that training program just because i think self-insured corporations are going to turn out to be major players in trying to reorganize health and payment reform in a variety of things. i think, in fact, the corporations have to be the ones have to be the one to add value to labor, they have to be willing to do that and i think many of them are. we've got this bizarre situati in the politics of the u.s. where we've set up an "us versus

them" camp. a device of the pie camp not growing the pie. and i think that's dysfunctional in terms of retraining workers and getting them employed again. >> and corporations are just shedding jobs now from the last few weeks there has to be growth for the government. we have to provide unemploymen benefits, yes, but what about telling those unemployment people you wor 20 hours a week in a public infrastructure program and you get paid or you get credit going to communy college. you can't just let people get the benefits and sit down and do nothing. we have to be more creative in the way we invent size people to get skills they don't have. >> i agree with that and i think the best labor economists would say that you're not going to retrain all these people suddenly make solar panels or do something like that.

you find other thingsfor them to do while they're collecting unemployment and focus your education and training dlars. >> rose: but that time are we going to lose the producing of solar panels and other kinds of environmental or green manufacturing to china. >> rose: now we can use at least the construction workers that are unemployment to put those solar panels in everhomend make it more energy efficient. we're in the going to produce the pals, they're going to be cheaply produced in china but then you can implement them this country. >> rose: that one part of the cost of labor and another part the ingenuity of their... >> well, it's a lot of things. they have the lower cost of labor but they also got subsidies by being able to borrow at lower rates. maybe the vertical integration of the the solar panel stwri and they bought everybody upstream and downstream have become more productive. so they've beat us in solar panels and are beating us in batteries. >> i'm more optimistic about

that, by the way, charlie. if you look at solar panels, yes, we lost but the chinese are in fact, very good at producing solar panels. if they produce cheaperolar panels and we can deploy them the u.s. and employ people to install them, that's not necessarily that bad for the economy. it may be good. and there are other areas in technology where i think there's growth for employment. if you look at biofuels, we have a possibility over a three to five-year time frame to have one dollar equivalent per gallon biofuels in the u.s. produced domestically. and i think one of the things that we have to worry about in the short run budget cutting process is cutting back on research and development, cutting back on translation of science into commercial products. that's going to be essential over the next 20 to 50 years. >> rose: gill gross, when you look at the emerging nations who have had aecided growth

advantage and labor advantage as wellis that going to continue or slow down as a competitive force? >> well, i think it's going to continue as long as the systemic unwind stops at a certain level and doesn't drag them down again like it did in the late 1990s. you know, the developing world has a number of things going for them. you mentioned the d.e.m. grafx, yes, secondly though, they have an underdeveloped consumer sector. that's the real problem in the united states, our consumer sector is maxed out in terms of 70% of g.d.p. and high depth in china and brazil the consumer sector is much more infantile in tes of development and has 10 20,, 30 years to grow. not just from the standpoint of percentage of consumption to g.d.p. but from the standpoint of relevering. and so they have distinct distinct advantages that the u.s. and other countries don't. >> rose: there's no doubt about

china's commitment togo fromn exporting model to a consumption model. domestic consumption model. so you have the awareness and the commitment. how long it takes is a different issue. >> right. and that's their five-year plan to gradually wean themselves from an export nation to a consumption type of nation. but one of the recipes, one of the remedys in doing that would be to revalue their currency and they do that very gradually. so it seems like they're unwilling to give up the ghost of a cheap currency and exports at the same time of developing an internal consumption-led economy. >> rose: well, first of all i dot know that it's all bad they become a consumption led economy because hopefully we can sell them some things. secondly, i think our ability to influence their currey just to go back... when you owe somebody $1.2 trillion, it's hard to then influence their currency. >> rose: but we tried hard. >> but only up to this far. rather than be too pessimistic,

let me point out a couple positive things. we are the world's leader in a lot of industries that involve high intlectual content. google and facebook weren't created in china or germany, they were created here. >> rose: question is whether the next one will be created there. >> okay, facebook was created here not that long ago. i think we are the repository of... someday the chinese will create these kinds of thing. right now they're ours. media is a business we are big in. financial services may be a dirty word in some parts of the cotry but we are the world's leader in financia services and it will continue to be a growth industry for the foreseeable future. so there are these high intellectual content businesses in which we have been leaders d i think we can remain leaders. >> so we saw decisions made in washington culminating last week. what's going to come out of those decisions that were made there? what is going to be the net result between now and december of this supercommittee and its impact? >> well, i don't think much, charlie. i mean, the net of the first

bargain was perhaps a $25 billion reduction in terms of spending over the next 12 to 18 months. so there's basically nothing there from prior negotiations. what will the gang of 12 produce? i suspect nothing of substance simply because of the division between republicans and democrats and the election year going forward. if anything the entitlements that perhaps will be reduced will be in the out years again and if any revenue raises or taxes as we used to call them... you know, i suspect they'll be minimal. and so, you know, we're looking at a 12 t 15-month period of time, is 12 to 18-month period of time which basically nothing gets done and the united states is drifting on a sea of liquidity, but low investment and high unemployment. >> i absolutely agree because i

think in effect what we're all looking for was what president obama described in his first book about audacity of hope. you want hope. you want people to believe tomorrow will be a better day. and when the debate is framed as those republicans wouldn't do something, the tea party is crazy, s&p are a bunch of idiots or we need to do x, y, or z or, in fact... it's not helpful. do i believe we need to raise taxes? absolutely. do i believe that we need to have entitlement reform? absolutely. was there some bargain to be done with the current congress and president? absolutely not. and until we begi to focus on the positive message about what's possible and then we get together t figure out how to make it possible, i don't think we're going to go very far. >> i think we're slightly conflating somewhat separate issues. one is the issue of our fiscal problems and whether this committee will resolve them or not. i'm slightly more optimistic

because there's a lot of teeth in this committee in terms of what happens later. >> rose: they don't want to face the triggers? >> and a whole bunch of other things that hand. but the int is i think we've all agreed in this disskugs that we need new policies, not cutting i would programs, we need new policies to discuss those issues. the president has proposed a few things, there's noill in congress, no interest in congress in taking on any new projts and that's why i think we drift along or worse for the foreseeable future. >> rose: are you more pessimistic about the future of the country than you've been in a long time having been in the private sector and the public sector? >> i am more pessimistic than i've been in a long time. >> rose: there was a moment there where you were a little optimistic about... >> well, you have to be realistic about the future. i mean, i think the scariest number i've seen ithat a year ago the armed forces... there was a study that said 74% of young americans aged 17 to 24 don't qualify for med services

because of either being obese or ug addicts or criminal or because they don't have a high school education. 474%. unless we invest in our new generations and give them the skills in education, we're not going to be able to compete with the chinese. the chinese today are producing ten times more engineers than we do. we're losing that bale and we ve to invest in our future. that's the problem we're facing in the united states >> rose: on that note, thank you nouriel, thank you, steve, thank you very much, bill and bill. >> thank you, charlie. >> thank you. >> rose: thank all of you for joining . we'll see you tomorrow night. captioning sponsored by rose communications

captioned by media access group at wgbh access.wgbh.org